News and views from New Zealand
Cracks are beginning to appear in the monolithic free market philosophy which has obsessed our two main political parties, Labour and National over the last three decades. David Cunliffe, since becoming the new leader of the Labour opposition, has taken pains to put at least the illusion of clear water between the philosophies of the two parties, which hitherto have looked dispiritingly similar. Attacking National on its appalling failure to build more state houses holds most promise for reasons I shall outline.
House prices have been slowly falling in NZ and no one was buying or selling, except those caught by negative equity (and the record low interest rates took care of the worst of the problem). So the Government assumed (as the far right does) that the market could be trusted to respond to demand as it arose, so the Government did nothing. And the market, left to its own devises, did nothing as well. Why build lots of houses when that would only reduce house prices. Why not simply sit on the land, since it is the land that appreciates in a boom, not the house construction costs? That’s what markets do. Millions of individuals pursuing their own self interest produce an outcome that, we are told, is always right.
While house prices inched down slowly, newly-weds could dream that one day they might own one. That illusion was shattered when house prices started to rise over the last year, firstly in Christchurch, which had the ‘benefit’ of an earthquake to push prices up, and later in Auckland, where misguided Government policy of centralising services there, put more pressure on a city already bulging at the seams.
While Dunedin average house values sank by 0.82% in the year to May, Auckland’s rose by 12.7%. This focussed attention on housing supply under this government compared to demand. Just to maintain existing building stock, minimally 42,000 leaky houses (and that is an article on free-trade failure in itself) will need replacement; as will a similar number of earthquake-damaged houses in Christchurch. Also in the post-earthquake panic the government has committed New Zealand to up-grading or bulldozing buildings that fail to meet new earthquake-proofing legislation. The number of houses in this case is not the issue – many of them are heritage buildings or churches. For Dunedin, which virtually lives off the tourism that our heritage buildings generate, this is an impending financial disaster. Nation-wide the cost will be in the billions.
Add to these figures that Auckland alone will need more than 130,000 houses over the next 3 decades to meet projected population growth and it is clear that the government needs to preside over a massive building program. So what is its record? In June this year the number of houses on the market reach a record six year low. Today’s (3rd Oct) news is that the downward trend continues.
The upshot is that in the last couple of months, house prices have unequivocally risen. The banks, scenting blood, have reduced mortgage rates to near record lows and have been offering 100% mortgage loans. So we are possibly facing another property bubble, before we have recovered from the last. The Reserve Bank clearly thinks so because it has decided that home buyers must put down a minimum of 20% of the total price. The median price of a house in NZ is $466,526, so a minimum deposit is about $90,000. The median household income is about $62,000 (and falling, incidentally). For a couple of newly weds it will probably be lower, so their prospects are grim. Because interest rates are low, Kiwis are choosing to pay down debt rather than save. That is the smart market-driven move but it has priced the median house out of reach of the median family unit.
In a blue funk, our PM, John Key, asked the Governor of the Reserve Bank to reconsider his decision. He refused. Of course. His job is to stop another property boom, not to feel sorry for home buyers. That’s John Key’s job. This leaves the Government with nowhere to go. Labour has produced a policy that claims it will build 10,000 State houses a year for the next decade, in addition to houses built by the private sector. Despite the usual political point scoring no one has said that the target is unattainable or unnecessary. Labour will also introduce a capital gains tax and will stop overseas speculators from buying NZ houses.
If there is a housing deficit the only solutions are to build more, or reduce demand by excluding speculators. The Labour solution meets both requirements. All that the Government can offer is a subsidy for new home- buyers, which meets neither requirement and will put the price of housing still higher.
Can things get any worse for home buyers and the government? Sadly, yes. For almost the entire time that this government has ruled, the OCR has been 2.5%. Recent events in the USA, where Quantitative Easing is being phased out and Congress is in gridlock, are spooking the market. The NZ dollar is overpriced and interest rates are unusually low. The hot money is now on an increase in the OCR early next year. A lower exchange rate will raise prices. Higher interest rates will increase debt and do horrible things to the housing market. And it’s an election year!
Dennis Dorney is an ERA member living in New Zealand